Our methodology for determining daily mortgage rates is somewhat complex, and involves an
objective component based on lenders raw prices as well as subjective
impression from our network of originators. We look at the actual rate
sheet offerings from most major lenders and calculate the buy-ups and buy-downs
between each rate (incidentally, rates tend to be offered in .125% increments,
which is why we're always conveying best-execution in .125% increments whereas
the actual daily average is reflected on the mortgage rates page).
Buy-ups and Buy-downs
As mentioned above, most lenders' rate sheets are structured with 0.125%
increments between the rates. For any
given RATE there is a COST associated. It's important to note that a cost can be negative or positive. This means that some rates with enough "negative cost" allow lenders to pay
some or all of the borrowers' closing costs.
It is almost always the case that higher
rates equate with lower costs. In
other words, a borrower may have to pay their own closing costs in one quote,
whereas the lender could cover a portion of the closing costs in a quote that
was .125-.250% higher.
Conversely, borrowers can opt to pay additional up front costs in order to BUY DOWN the rate. This may or may not be advisable depending on
the borrowers' personal preferences as well as the economic logic and break-even time required for paying the
extra costs. In other words, paying more
up front means that you'd need to keep a loan for a particular period of time
in order to save enough in terms of lower monthly payments to break even on the additional up front
These buy-ups and buy-downs (costs to move higher or
lower in rate) can vary greatly from rate to rate. For example, on a $200,000 loan, it may only
cost $800 to move to the next .125% lower in rate whereas the next .125% could
Best-Execution: The Sweet Spot
The variations in the buy-ups and
buy-downs create sweet spots where
the combination of COST and RATE is
more efficient at one rate vs another. While
there is an inherent degree of subjectivity in assessing this sweet spot, there
are also several proprietary objective
factors that help determine Best-Execution.
In general, our Best-Execution rate mentioned in the RateWatch article each
day will be the most efficient combination of rates and fees at a cost level that typically allows most
well-priced lenders to offer a no-closing-cost
(at the very least, this means no fees/points charged by the lender) quote for
the most ideally qualified borrowers.
We don't rely on numbers alone in making this determination, especially if
several adjacent rates are viable contenders for Best-Execution. In this case, we involve our community of
mortgage professionals to get a consensus not only of what they're quoting, but
also which options their clients are choosing. This subjective method
is combined with the objective measurements taken from lenders to arrive at
the consensus range.
Best-Execution Vs. Day-Over-Day
Changes In Rates
Because rates are generally offered in 0.125% increments, it's rare that
markets move enough in one day to cause Best-Execution to adjust to the next
eighth higher or lower in rate. However,
markets are always moving and on a vast majority of days, the COSTS associated with the RATES are moving. These smaller day-to-day variations are
accounted for by the daily changes seen on our mortgage rates page.
On this page, you will see interest rates that aren't available in order to
illustrate the day-to-day movement in mortgage rates even when that movement
isn't sufficient for us to announce a shift in the Best-Execution rate.
The bottom line is that Best-Execution is found only in the RateWatch
articles and moves up or down only in .125% increments and only when the
underlying costs have changed enough that the new Best-Execution rate becomes
more efficient than the previous one. The
rates seen on the mortgage rates page are a purely notional representation of
the day-to-day movement on rate sheets.
All About The CHANGE
In the cases of both the Best-Execution rate and the daily changes seen on
the mortgage rates page, please keep in mind that there are
numerous variables that can affect loan pricing for any given scenario. Both of our rate metrics won't apply to every
borrower in every scenario and are generally on the more aggressive side of the
market. They assume an ideal scenario
with top tier credit qualifications and loan factors
Their ideal use is to benchmark the day-to-day changes as they
provide a common point of reference. As you read along, you may have to
infer that when we're talking about a .125% improvement in rates that your own
starting point may have been different from our Best-Execution starting point.
Unless your scenario falls in that "best case" category, the
important thing to track is the CHANGE
as opposed to the outright levels. Above all, your mortgage professional should
always be able to show you several
options and explain any factors in your scenario that are affecting pricing.
On a final note, even after speaking to your mortgage professional about
factors affecting pricing, it can still be the case that different lenders
quotes would vary. Decisions around this
topic are more subjective, but we'd
advocate not letting costs be the be-all-end-all deciding factor, even if they're
the most important for you. Great service and well-managed expectations are worth a lot, and that's something we
can't quantify for you. A smooth and
timely mortgage process can end up saving you more money than the lowest
possible quote you can find. When in
doubt, ask your trusted mortgage professional.